Senomyx Inc. (NASDAQ:SNMX)
Q3 2012 Earnings Call
November 08, 2012, 11:00 am ET
Gwen Rosenberg - VP, IR & Corporate Communications
Kent Snyder - Chairman & CEO
John Poyhonen - President & COO
Tony Rogers - SVP & CFO
Scott Henry - Roth Capital
Dalton Chandler - Needham & Company
Good morning. We will now begin the Senomyx Third Quarter 2012 Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open the conference for questions-and-answers after the presentation. (Operator Instructions)
I would now like to turn the call over to Gwen Rosenberg, Senomyx’s Vice President of Investor Relations and Corporate Communications. Please proceed.
Good morning and welcome to the Senomyx third quarter 2012 earnings and corporate update conference call. Participating on this call from Senomyx will be, Kent Snyder, Chief Executive Officer; John Poyhonen, President and Chief Operating Officer; Tony Rogers, Senior Vice President and Chief Financial Officer and Sharon Wicker, Senior Vice President and Chief Commercial Development Officer.
Before we begin, please note that during the course of this call, we may make projections or other forward-looking statements regarding future events or financial performance of the company that involve risks and uncertainties. The company’s actual results may differ materially from the projections described in the press release and this conference call.
Factors that might cause such a difference include, but are not limited to those discussed in our quarterly and annual reports filed with the SEC. Copies of these documents are available upon request from Investor Relations at Senomyx or maybe accessed via our website, at www.senomyx.com.
I’ll now turn the discussion over to Kent Snyder, CEO of Senomyx.
Thank you, Gwen. Good morning to everyone and thank you for joining the Senomyx management team for our conference call and webcast. During the call, we will provide you with a financial update for the third quarter of this year and a general update on our business activities since our August conference call. This will be followed by a question-and-answer session.
We are pleased to announce today that a Senomyx partner has begun its initial market launch of a retail product and incorporated our S6821 Bitter Blocker. This is the first time a Senomyx Bitter Blocker has been used in a consumer product. Marketing activities are underway in a country in Southeast Asia and we expect that overtime, our partner will expand their usage of S6821 to other regions and products.
With this launch, flavor ingredients from our are Savory Taste Program, Sweet Taste Program and Bitter Blocker program are now being commercialized by our partner. The recent regulatory approvals of Senomyx flavor ingredients in the US, Europe and elsewhere are also significant for the company. These are validations of our scientific and regulatory accomplishments as well as the safety of our proprietary ingredients.
One of the new approvals relates to our S9632 flavor ingredient which was granted and generally recognized as Safe or GRAS regulatory status. S9632 can be used to restore the desired taste profile in a wide variety of foods and selected beverages, in which sucrose, which is a common table sugar has been reduced. The GRAS data allows S9632 to be incorporated into specified products in the US and numerous other countries.
As John will discuss later in the call, S9632 presents a valuable long-term, commercial opportunity for Senomyx. These regulatory achievements follow the receipt of positive determination during the third quarter for four Senomyx flavor ingredients from our Sweet and Bitter Blocker programs by the international body known as the Joint FAO/WHO Expert Committee on Food Additives or JECFA. We are very pleased to have received all of these regulatory approvals which broadens the potential markets for our flavor ingredients.
Turning to our discovery and development efforts, on our last earnings call, we introduced S617, a unique new flavor ingredient intended to be used to restore the desired taste profile of products in which either sucrose or High Fructose Corn Syrup often known as HFCS has been reduced. S617 is Senomyx’s first flavor ingredient that exhibits the ability to address products with reduced HFCS, a sweetener used primarily in beverages. The utility of S617 with both HFCS and sucrose could allow manufacturers that use these sweeteners to focus our internal efforts on a single ingredient potentially increasing efficiency and cost effectiveness.
Taste tests have demonstrated that S617 is effective in a variety of beverage prototypes including carbonated soft drinks in which up to 35% of the HFCS or up 50% of the sucrose has been reduced. These results were achieved with very low concentrations of the S617 which could provide cost and use benefits to food and beverage companies that incorporate S617 in their products.
As we discussed previously, in light of these valuable attributes, we agreed to work with our partner PepsiCo to advance S617 into a preliminary development phase which includes the safety studies and other activities necessary to support regulatory filings in the US and elsewhere. We are making good progress with development activities for S617. Initial safety studies have been completed successfully and further activities are ongoing. Evaluations of S617 in a variety of products of interest are underway. We are very optimistic about S617 and we will provide guidance regarding the timeline for regulatory approval on future conference calls.
We are also using Senomyx proprietary Sweet Taste technologies to discover and develop natural high-potency sweeteners and other sweet flavor ingredients. We are continuing to expand our targeted natural-source library used for this effort. Our screening assays has successfully identified a natural compound that provided a sweet taste and further screening activities are ongoing to identify more [prudent] natural high-potency sweeteners.
Looking at our other flavor programs, Senomyx and our partner Firmenich are currently evaluating a number of cooling agents discovered our under cooling taste program, in order to identify one or more candidates that demonstrate advantageous properties compared to commonly used cooling agents. These attributes include greater potency, longer cooling duration or lack of aroma.
We are also continuing efforts with our Salt Taste Program which is an important research focus for Senomyx’s longer-term pipeline. Our goal is to identify flavor ingredients that restore the desired salty taste in foods and beverages and in which sodium has been reduced.
Progress is been made explaining the role of a number of proteins that maybe involved in salt taste perception. We are now evaluating specific proteins that could be viable candidates for the receptors or co-factors responsible for salt taste and additional work is ongoing.
Lastly, I would like to note that Senomyx continues to be diligent in seeking protection of our intellectual property. As of September 30, the company is the owner or exclusive licensee of 345 issue patents and several hundred pending patent applications related to our proprietary taste side technologies in the US, Europe and elsewhere.
I will now turn the discussion over to John Poyhonen, who will provide an update regarding current commercialization and new commercial opportunities. I will return with a few closing comments at the end of the call. John?
Thank you, Kent. I will start my comments with the commercialization of flavor ingredients resulting from our Sweet Taste Program. Our partner Firmenich is currently commercializing S2383 which can be used to restore the desired case profile of products in which up to 75% of the sucralose has been reduced.
S2383 can be used at all food and beverage product categories which utilize sucralose. Products that contain S2383 are currently being sold in North America and the Latin America by Firmenich’s clients and follow on launches are being planned.
Additional Firmenich customers are conducting product development work for potential usage of S2383 in a variety of products. Commercialization plans for Europe are being evaluated as a result of the recent EU approval of S2383. Firmenich is also commercializing S6973 which can be used to restore the case profile and products and which are up to 50% of the sucrose has been reduced.
Firmenich has an exclusive worldwide rights to commercialize S6973 for use in virtually all food categories as well as certain beverages such as ready to drink and powdered forms of tea, coffee and milk products. The dedicated sales and technical resources are currently working to support the commercialization efforts of top-tier and mid-tier clients in the Americas, Southeast Asia, Africa and Australia.
Market launches of retail products that incorporate S6973 have occurred in the United States, Latin America, Asia and South Africa. We are pleased that companies that have completed their initial launches of products containing S6973 are reordering it.
We expect that before the end of the year Firmenich’s clients will expand into new product categories and geographies. In addition, product launches by new clients are anticipated in the coming year and beyond. Other customers have placed orders for product acceptance testing, an additional premarketing activities. Like S6973, our new S9632 flavor ingredient can be used to improve the case profile in which up to 50% of sucrose has been reduced.
Both flavor ingredients are solutions for manufacturers that are trying to respond to the rising consumer focus and health and wellness by creating new lower calorie offerings that retain the taste of sugar that consumers enjoy.
In addition to improving the nutritional profile of products, use of the Senomyx flavor ingredients may provide cost savings for manufacturers few significant market drivers for both S6973 and S9632.
As Kent noted, S9632 was recently granted GRAS regulatory status. The GRAS designation allows S9632 in a broad range of non-alcoholic beverages, alcoholic beverages such as pre-mixed alcoholic drinks and liquors and a variety of foods including dairy products, confectionaries, snack bars and sauces.
The incremental advantages of S9632 compared to S6973 are primarily its utility and powdered and liquid concentrate forms of beverages such as fruit flavored soft drinks as well as some alcoholic beverages.
Firmenich has exclusive rights to commercialize S9632 for food and alcoholic beverage applications and co-exclusive rights for powered beverages. They have begun manufacturing commercial scale quantities and are working on product prototypes to demonstrate to their clients.
Senomyx retains all rights for use of S9632 and non-alcoholic beverage categories and co-exclusive rights for powdered beverages. We believe that S9632 is an important aspect for the company. Based on your monitor data, the non-alcoholic beverage product categories targeted for S9632 have a global retail market value exceeding $95 billion and utilized more than 3.8 million metric tonnes of sucrose.
Even a modest penetration rate would create meaningful commercial revenue for S9632. So our goals for S9632 were clear. We are focusing on developing strategies to maximize the long-term commercial potential and expand the usage of S9632 in unlicensed product categories.
We are currently evaluating options that would give Senomyx greater visibility into commercialization activities, greater control of commercial results and allow us to share in a greater portion of the value of S9632 that we [could] achieved under the structure of our current collaboration arrangements. We are excited about the market potential and we will keep you informed as our business activities progress.
I would like to close with an update on a few of our other products including our savory flavor ingredients. As we have discussed previously, our savory flavor ingredients have a variety of uses. Each of them provides a distinct new savor case sensation that can be used to combine with other ingredients to create unique new flavor blends.
The savory flavors are very versatile and can be used in a variety of food products such as sauces, frozen foods, cooking aids, soups and snack foods. The recent approval of our four initial savory flavors in the European Union permits usage in the EU beginning in late 2013.
Our partners are current assessing commercialization plans in light of these approvals and we will provide additional insights as they finalized their plans in the future. Lastly, the new market launch in a Southeastern Asian country of products incorporating our S6821 bitter blocker was another milestone for the company.
Our marketing partner is also evaluating the use of S6821 in additional products and geographies. To give you some perspective of the opportunity, their global sales of products and their licensed product categories eligible for usage of S6821 are in the multibillion dollar range.
Senomyx’s compensation is volume based and determined by the amount of S6821 use in our partners’ products. We will provide further information about S6821 commercialization on upcoming calls.
This completes my update. Tony Rogers Senomyx’s CFO will now provide a financial overview of the company. Tony?
Thank you, John. Senomyx ended the third quarter 2012 with $44.7 million in cash, cash equivalents and investments available for sale. During the third quarter, we earned $1.3 million associated with the achievement of development milestones. We expect to receive this $1.3 million during the fourth quarter.
Revenues were $7.9 million for the three months ended September 30, 2012; compared to $7.1 million for the same quarter in 2011. The increase in total revenues was primarily due to the $1.3 million of development milestones earned in the third quarter.
This increase was partially offset by lower upfront license fee revenue in 2012 compared to 2011 which was due to Senomyx partner electing to extend its collaboration agreement in the second quarter of 2012 by one year. This extension resulted in a one year extension of the service period over which the upfront license fee is recognized.
There was no impact on cash flow in either period as the related upfront payments were received prior to 2011. Revenues were $22.9 million for the nine months ended September 30, 2012 compared to $22.8 million for the comparable period in 2011. Included in this year-to-date revenues through September 30, 2012 is $2.7 million in commercial revenues.
The net increase in revenues primarily results from increased development milestones earned in 2012 offset by lower upfront license fee revenues recognized in 2012 compared to 2011.
Research and development expenses were $7.2 million for the three months ended September 30, 2012 compared to $7 million for the same quarter in 2011. General and administrative expenses were $2.7 million for the three months ended September 30, 2012 compared to $2.8 million for the three months ended September 2011.
Research and development expenses were $21.5 million for the nine months ended September 30, 2012 compared to $21.6 million for the same nine months in 2011.
General and administrative expenses were $8.5 million for the nine months ended September 30, 2012 compared to $8.3 million for this timeframe last year.
The net loss for the three months ended September 30, 2012 improved to $0.05 per share compared to $0.07 per share for the third quarter of 2011. The net loss for the nine months ended September 30, 2012 improved to $0.17 per share compared to $0.18 per share for the nine months ended September 30, 2011.
Overall financial results through September 30 were inline with management expectations and we are on track to achieve our financial guidance for 2012.
In addition to the $44.7 million dollar in cash and highly liquid investments at September 30, 2012, the company has committed funding and potential future sources of cash including the following: $1.3 million of milestone payments earned in the third quarter of 2012; ongoing royalty payments from collaborators; $16 million in research and development funding commitments from current collaborators; $21.7 million related to expansion options under current collaborations; and $23.7 million in potential milestone payments under current collaborations.
With respect to financial guidance for the full year 2012, Senomyx continues to expect total revenues of $30 million to $33 million of which $4 million is commercial revenue, total expenses of $39 million to $42 million of which approximately $5 million is non-cash stock based expense and net loss of $8 million to $10 million basic and diluted net loss of $0.20 to $0.25 per share and year-end cash, cash equivalent and investment balance grade of $40 million during the year.
This concludes my comments about the company's financial status. I will now turn it back over to the operator to open up for questions.
(Operator Instruction). Mr. Synder our first question comes from Scott Henry representing Roth Capital.
Scott Henry - Roth Capital
Just a couple of questions, first the $1.3 million milestone. I took a glance at the 10-Q, it looks that came from Pepsi. First is that accurate, that the entire milestone came from Pepsi, and second can I assume that its related to the S617 product or some sort of development target there.
Actually there were two milestones earned in the third quarter for a total of $1.3, one was from Pepsi and the other is from Firmenich and they were earned under our sweet taste program collaboration and they were actually in connection with 9632.
Scott Henry - Roth Capital
I'm not sure, but have you provided guidance on commercial revenues in the past. I saw you had targeted roughly $4 million for 2012, is that correct.
Scott that is correct and we reiterated that today.
Scott Henry - Roth Capital
I guess we should expect in somewhat of an inflection point in fourth quarter ’12. Are you expecting some orders coming in, you must feel comfortable, I guess it depends how you define $4 million if I mean 4 even or 3.5. But I'm just trying to get an idea what you think about fourth quarter.
Well, we reiterated the $4 million so we feel we comfortable that we’ll get there and as you are looking at $2.7 to the third quarter you see that we are looking at an increase in the fourth quarter. Keep in mind Bitter is coming online and we do have visibility into the other programs and so we feel comfortable that we will achieve that target.
Scott Henry - Roth Capital
Final question, just a small question, but when I look at G&A it did bounce a little bit in the fourth quarter of 2011 should I expect to see that trend continue in 2012?
I don't know if I can speak whether you can see a balance in the fourth quarter. I think as I reiterated today, we're still tracking to our expense guidance overall. But I don’t know if I look for necessarily a balance in the fourth quarter of this year in G&A.
The next question comes from the line of Dalton Chandler representing Needham & Company. Please proceed.
Dalton Chandler - Needham & Company
Congratulation on the GRAS approval for S9632. Related to that, you said you have partners that are working on commercialization. Can you give us any more detail on what stage of development they are at and when we could expect to see some products on the shelf?
Hi, Dalton. This is John. Thanks for the congratulation. That was obviously a big event for the company. With respect to S9632, the rights and food categories, alcoholic beverages and (inaudible) and powdered drinks are covered by our Firmenich agreement. So our Firmenich is making, what we think is very good progress on it. They completed or are in the process of completing their commercial scale up of S9632, and I think that is a major hurdle that we always have to get over as making sure that commercial quantity is available.
We would expect that early in 2013 to be available. In parallel, we reacquired the rights from PepsiCo all non-alcoholic beverage categories, and right now we're pursuing a number of different strategies to really maximize the volume of that in that important product category. So probably more to come as we complete the year and go into our March earnings call, but we will give you a bit more guidance at that time on what the commercial prospects look like.
Dalton Chandler - Needham & Company
Okay, it sounds like you are talking about may be the second half of next year?
That’s I think right now until you get the actual orders and you go through the market acceptance testing and everything else it’s a bit early to predict, but certainly we would expect to be prepared from an inventory standpoint to be able to start commercializing in the second half of ‘13.
Dalton Chandler - Needham & Company
You mentioned John you are now starting to see the initial customers reordering on S6983. Can you talk about what sort of volume you are seeing on reorders versus initial orders?
Yeah it varies based on the timing of their actual initial orders, but I think what we have always talked about is, we believe that the expansion of S6973 was going to occur in a number of different platforms, one was horizontal expansion. So moving from things like ready-to-drink into powder type beverages and we are starting to see that happen. Additional expansion into geographic areas and we are starting to see that happen, obviously the approval of [Jeff] that we received in June of this year, gives us much broader opportunity for Firmenich’s clients to use the products that’s beginning to occur and then we are also seeing expansion into additional categories within strategic business units like going from yogurt, dairy beverages, also looking into dairy products into banquets and all those things are occurring. So we are seeing a fairly consistent reorder quantity from these customers, but its hard to judge how much of that is actually reordered compared to expansion that they are doing. We hope to provide more visibility in the coming calls on that. But I think things look promising thus far.
Dalton Chandler - Needham & Company
Just last question; I know you haven't given 2013 guidance yet, but just any sort of commentary you could make on that, especially as it relates to commercial payments?
Yeah, I think rights now it’s a bit early, we are working with our partner on that program right now. They are doing a bottom up reforecast of all of their goals for next year and that's been processed right now. So they are going down to the account level to help roll up what the commercial value could be, but we would expect in that March timeframe to provide more details at that time.
Ladies and gentlemen, this concludes the question and answer session. I will now turn the call back to Mr. Snyder to conclude.
Well, thank you all very much for participating in the Senomyx call today. Looking at the past few months, we are very pleased at the two important events that we had targeted for accomplishment by the end of this year, namely the GRAS designation for S9632 and the market launch for products containing our S6821 Bitter Blocker have already occurred.
In addition, our four initial savory flavors S2383 became the first Senomyx flavor ingredients received the regulatory approvals in the European Union. These achievements highlight Senomyx proven experience in the field of taste science which has led to 11 innovating flavor ingredients that achieved regulatory approvals in the US and numerous other countries, as well as several 100 patents issued in the US and elsewhere.
In our Sweet Program alone we have discovered four novel ingredients S2383, S6973, S9632 and S617; each of which displays unique advantageous characteristics. We are confident that Senomyx is in an excellent position to increase shareholder value. We believe that further success with our discovery and development efforts and the continuing commercialization of Senomyx flavor ingredients by four world class partners and our new business development activities provide important value drive for both short and long term. This completes our update call.
We appreciate your time and interest in Senomyx, and if you have any additional questions please feel free to contact us directly through our website. Again thank you very much.
Ladies and gentlemen, this concludes your conference call for today. All parties may disconnect.
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